How You Can Gain From the Explosive Trajectory of China's Currency

Edging out Japan, it’s set to soon become the world’s second largest economy. It’s already overtaken Germany as the world’s largest exporter by shipping $1.2 trillion worth of goods in 2009. As a result, China looks destined for strength, as does its currency the yuan. It’s currently pegged to the dollar, but there is a great deal of economic and political pressure building up to break the managed exchange rate.

From The Business Insider:

“The last really big currency realignment was a series of devaluations that took the Yuan down from a high of 1.50 to the dollar in 1980. By the mid nineties it had depreciated by 84%. The goal was to make exports more competitive. The Chinese succeeded beyond their wildest dreams. There is absolutely no way that the fixed rate regime can continue.

“There are only two possible outcomes. An artificially low Yuan has to eventually cause the country’s inflation rate to explode. Or a global economic recovery causes Chinese exports to balloon to politically intolerable levels. Either case forces a major revaluation.”

When a revaluation would take place is, of course, the major issue. China is used to receiving criticism for its artificially weak currency, and will likely continue to bear ongoing calls for a free floating rate. Even though per capita incomes have risen considerably in the developing nation, at $5,000 per year they remain a fraction of the levels seen in the industrialized world.

Still when it happens, and according to this article it eventually must, the yuan would likely gain 50 to 100 percent in value. The recommendation?

“Buy the Yuan ETF, the (CYB). Just think of it as an ETF with an attached lottery ticket. If the Chinese continue to stonewall, you will get the token 2.2% annual revaluation the swaps have been discounting. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills. If they cave, then you could be in for a home run.”

About Rocky Vega:

Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update — which he ran from Brazil, Chile, and Puerto Rico — as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let?s Go Publications, Harvard Student Agencies, and The Harvard Advocate.